Why Rupee Value depreciating more and more..?

Indian Finance Minister Palaniappan Chidambaram has battled currency markets
for two months, trying to stem the collapse of the Indian rupee from 55
to a dollar in May to 65 this week. He has found commanding currency
markets even harder than commanding the ocean waves.
He should
stop trying. A weaker rupee is not inherently a terrible thing. Rather
than frantically shoring up the currency, Chidambaram should target the
structural impediments in the economy that have caused both Indian and
foreign investors to lose faith in the once-glowing India story.
A
falling rupee is a political, not an economic disaster. The plunge
raises import prices and exacerbates inflation in the run-up to the next
general election, just eight months away. In an attempt to support the currency, the government has increased import duties on gold and consumer durables, and has raised short-term interest rates to curb currency speculation.
What’s
bad for electoral prospects, however, can be good for an economy
running a current account deficit that’s reached 4.8 percent of GDP. A
cheaper rupee will encourage exports and discourage imports. Inflation
will erode some of these apparent advantages. Indeed, the rupee’s fall
from 45 to 60 a dollar from 2011 to June 2013 didn’t lift exports at
all: The advantages were offset by high inflation and a lousy business
climate. However, exports rose 12 percent in July, suggesting that the rupee may finally have fallen enough.

Strangled Birth

The
danger now is that dysfunction in the Indian economy will strangle any
incipient export boom at birth. GDP growth slowed to 5 percent last
year, after racing along at 8.5 percent for a decade. Industry and,
until the recent uptick, exports have stagnated. Inflation has soared.
The current account deficit is almost double what the Reserve Bank says is sustainable. A year ago, rating companies threatened to downgrade India to junk.
Chidambaram was recalled to the Finance Ministry
to stave off that verdict. He cut the fiscal deficit from 5.8 percent
of GDP to 4.9 percent, and promised a further reduction this year. He
initiated reforms, including liberalized entry for retail giants such as
Wal-Mart Stores Inc.
The hope was that fiscal discipline plus
reforms would revive animal spirits among investors, and produce an
economic spurt before the elections. The plan was on track until May:
Inflation fell, interest rates were cut three times, and $20 billion of
foreign portfolio investment flowed in. But after Fed Chairman Ben S. Bernanke said he would soon phase out quantitative easing, inducing higher interest rates, billions of dollars flooded out of emerging markets into the U.S., seeking higher yields. All emerging-market currencies swooned, including the rupee.
Finance
Ministry officials argue that the rupee at 65 is irrational, a clear
case of overshooting. They’ve forgotten two maxims of John Maynard Keynes.
One is that people will ultimately do the rational thing, but only
after exploring all the alternatives. The second is that markets can be
irrational for longer than you can stay solvent.
India’s foreign
exchange reserves are substantial at $280 billion, but foreign debts of
more than $170 billion have to be rolled over in the coming year, so
running down reserves is not an option. Chidambaram has sought other
ways to bridge the current account deficit: quasi-sovereign bonds,
liberalized corporate borrowing overseas and a special bond issue for overseas Indians.
But
attracting dollars is not enough. Underlying the economic slowdown is a
virtual investment strike by Indian businessmen, who have been put off
by the terrible business climate. Corruption is a major issue. In areas
such as real estate, minerals and government contracts, honest business
has long been impossible. But dishonest business with bribes could be
done, and kept these parts of the economy growing. Recently bribes have
become more difficult, sometimes impossible, after activist judges began
inquiring into scams, buttressed by a new Right to Information Act that exposed government files to public scrutiny. Result: The bureaucracy has stopped moving files.

No Enthusiasm

Many Indian businessmen say they would rather invest abroad than in India. Apollo Tyres Ltd. (APTY), India’s top tire manufacturer, has acquired Cooper Tire & Rubber Co. (CTB) in the U.S., and says its next investment priorities lie in Serbia, China and Mexico. If Chidambaram can’t get India businessmen excited, can he really enthuse foreign ones?
Sadly,
last year’s reforms are not translating into large orders for equipment
and machinery, the kind that would start a true industrial and export
surge. Foreign investment in retail may have been liberalized, but so
many conditions are attached that not one dollar has actually flowed in.
The cabinet may have just cleared 1.7 trillion rupees’ worth of
projects, but these haven’t produced the expected explosion of orders.
In some cases, further clearances are needed from state governments. In
other cases, businessmen are delaying investment until the economy picks
up.
Chidambaram doesn’t have enough weapons to prop up the exchange rate.
Rather, he should concentrate on converting cleared projects into
actual physical investment and on converting the cheaper rupee into an
export boom. If investment and exports begin to surge again, business
confidence will return. That’s when the rupee will strengthen.